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What Is PMI and How to Avoid It

Private mortgage insurance is the line item most first-time buyers don't expect. Here is what PMI is, what it costs, the legitimate ways to avoid it, and the rules that force lenders to drop it.

Key takeaways
  • PMI is insurance that protects the lender, not you, when you put less than 20% down on a conventional loan.
  • Typical cost: 0.5% to 1.5% of the loan amount per year, paid monthly inside your mortgage payment.
  • Federal law (the Homeowners Protection Act) requires automatic PMI cancellation at 78% loan-to-value, and lets you request cancellation at 80%.
  • FHA loans use a different program called MIP — and on most new FHA loans MIP lasts the life of the loan.

What PMI actually is

Private mortgage insurance is a policy a lender buys (and bills to you) when your down payment on a conventional loan is less than 20%. If you default, PMI pays the lender — not you, not your family. You pay for it because the lender is taking on more risk lending more of the home's value.

PMI applies to conventional loans (Fannie Mae / Freddie Mac). FHA loans have their own version called MIP (mortgage insurance premium) with different rules. VA loans have no monthly mortgage insurance — just a one-time funding fee. USDA loans have both an upfront guarantee fee and a small monthly annual fee (about 0.35% of the balance per year).

How much does PMI cost?

PMI runs roughly 0.5% to 1.5% of the loan amount per year, divided into monthly payments. The exact rate depends on your credit score, your loan-to-value (LTV) ratio, and the loan term.

Quick example

$400,000 home, 10% down ($40,000), $360,000 loan. At a PMI rate of 0.75%, that's $2,700/year — about $225 per month added to your payment until PMI drops off.

How to avoid PMI

  • Put 20% down. The classic path. No PMI at origination on conventional loans.
  • Piggyback (80/10/10) loan. A first mortgage at 80% LTV, a second mortgage (HELOC or fixed) for 10%, and 10% down. No PMI, but the second loan carries a higher rate and shorter term. Make sure the blended cost actually beats just paying PMI.
  • Lender-paid PMI (LPMI). The lender pays the PMI in exchange for a slightly higher interest rate (typically 0.25-0.5% higher). It's permanent — unlike borrower-paid PMI, it doesn't drop off. Run the break-even math before choosing it.
  • VA loan. If you're eligible, no monthly PMI even at 0% down — just a one-time funding fee.
  • USDA loan. Has both an upfront guarantee fee and a small monthly annual fee (about 0.35% of the balance per year). The monthly cost is usually lower than conventional PMI, but it is not zero.

When PMI drops off (the rules you can use)

The federal Homeowners Protection Act of 1998 gives you three concrete rights on borrower-paid PMI for a primary residence:

  • Automatic termination at 78% LTV. When your loan balance reaches 78% of the home's original value on the original amortization schedule, the lender must cancel PMI automatically, provided you're current on payments.
  • Borrower-requested cancellation at 80% LTV. You can request cancellation in writing once the balance reaches 80% of the original value. The lender can require a good payment history and may ask for a current appraisal at your expense.
  • Final termination at the loan midpoint. Even if LTV hasn't dropped to 78%, PMI must end at the midpoint of the amortization schedule (e.g. year 15 on a 30-year loan).

Appreciation counts too: if the home value rises and you can prove a new 80% LTV with an appraisal, most lenders will cancel PMI. Lender policies vary on how long you must hold the loan first (often 2-5 years).

A note on FHA MIP

FHA loans use MIP, not PMI. For most FHA loans originated after June 2013 with less than 10% down, MIP lasts the life of the loan — it doesn't drop off at 78% LTV. The only way out is usually to refinance into a conventional loan once you have 20% equity. Factor this in when comparing FHA vs. low-down-payment conventional.

Try the math yourself

See exactly how PMI changes your monthly payment at different down payments in the mortgage calculator.

Frequently asked questions

Is PMI tax deductible?

Yes — the mortgage insurance premium deduction was restored permanently starting with tax year 2026 under the One Big Beautiful Bill Act (signed July 2025). It is treated as deductible mortgage interest on Schedule A, within the $750,000 loan limit. This covers conventional PMI, FHA MIP, the VA funding fee, and the USDA guarantee fee. The deduction phases out between $100,000 and $110,000 of adjusted gross income (AGI). Confirm the current rules with a tax professional.

Can I just pay PMI off upfront?

Yes — most lenders offer single-premium PMI, paid as a lump sum at closing or rolled into the loan. It's cheaper than years of monthly PMI if you keep the loan long enough, but you don't get a refund if you sell or refinance early.

Does refinancing get rid of PMI?

If your home has appreciated enough that the new loan is at or below 80% LTV, yes — a conventional refinance can eliminate PMI without waiting. If rates have risen since you bought, weigh the rate increase against the PMI savings.

What's the difference between PMI and homeowners insurance?

Homeowners insurance protects you and the lender against damage to the property (fire, storms, theft). PMI protects only the lender against you defaulting on the loan. You'll typically pay both until your LTV is low enough to drop PMI.

HomeAfford provides educational estimates and general information, not financial, tax, or legal advice. Always confirm specifics with a licensed professional.

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